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The term structure of credit spreads in project finance

✍ Scribed by Marco Sorge; Blaise Gadanecz

Publisher
John Wiley and Sons
Year
2008
Tongue
English
Weight
190 KB
Volume
13
Category
Article
ISSN
1076-9307

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✦ Synopsis

Abstract

This paper finds that the term structure of credit spreads in project finance is hump‐shaped. This contrasts with other types of debt, where credit risk is shown instead to increase monotonically with maturity ceteris paribus. We emphasize a number of peculiar features of project finance structures that might underlie this finding, such as high leverage decreasing over time, long‐term political risk guarantees and the sequential resolution of uncertainty along project advancement stages. Our result is particularly relevant given the importance of project finance as a source of long‐term capital for infrastructure especially in developing countries and has implications for risk management in the framework of Basel II. Copyright Β© 2007 John Wiley & Sons, Ltd.

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